India Inc has made its biggest foray yet into Africa, with Airtel waiting to sew up its $10.7 bn acquisition of the African assets of Zain Telecom. The deal will ensure the combined entity has 171 million subscribers in 19 countries, and will make it the seventh largest in the world in terms of the subscriber base (in terms of revenues, of course, the combine will be much lower down the pecking order — Verizon which is the 9th in terms of subscriber has a revenue of $108 bn, as compared to $66 bn for China Mobile, which has the largest subscriber base in the world at 533 mn). The deal, once all the paperwork is completed — Zain’s board approved the deal last week — will make it the second-largest outbound M&A deal from India after the Tatas bought Corus in the UK; despite how the stock markets have greeted the deal, Bharti was able to raise the required debt of $8.5 bn at levels which were very attractive, signalling that both India and Bharti retain a large part of their flavour in global financial markets. This is Bharti's third attempt to get in to the African market — twice for MTN — but this is not the only company that's attempting to do so since, after India, Africa represents one of the most under-penetrated markets for a host of services. While Bharti’s looking at the telecom side, the Tatas, Mahindra & Mahindra, Essar, Marico, Godrej Consumer Products are all in Africa. Mr Sunil Mittal has shown he can take a big bite, now he must show he can chew and digest it as well.
The problem with the Zain deal, of course, is that it loads the company with debt and that's the reason why stock markets the world over don't like big deals — they make the acquirer company vulnerable to fluctuations in interest rates. There is also the problem that most M&As seem to have, of making them deliver what looks so easy on rosy spreadsheets — in the Zain case, Bharti will have to deal with 15 different regulators and 15 national governments, 15 different sets of work forces, and so on. The additional issue that has made markets jittery is the foreign exchange risk. While Mittal is raising funds in dollars to finance the deal, Zain's Africa revenues are deeply susceptible to currency fluctuations — while Zain's overall revenues rose 14 per cent and ebitda grew 26 per cent in the first nine months of 2009, Africa revenues fell from $3,067 mn in the first nine months of 2008 to $2,697 mn in the same period of 2009; ebitda fell from $1,046 mn to $900 mn. That all of this happened due to currency fluctuations makes Mittal's task that much tougher. At current levels of operations/efficiencies, the deal is unviable — at current ebitda, the multiple is over 11 as compared to Bharti's ebitda multiple of 6.5, RCom’s 4 and Idea’s 5.5. If, however, ebitda rises to $2 bn next year as Mittal is confident it will, the ebitda multiple will look reasonable. This is where Bharti’s ability to replicate its Indian operations — the so-called ‘minute factory’ where, with low tariffs, revenues are maximised — come in. The deal is a play on both Africa and Bharti's ability to replicate its operating model — it is an experiment worth watching.